Question

A large pharmaceutical company invites you to take a position of a financial advisor in their new pot growing division. The division will be financed with $1 million in debt and $4 million in equity. The tax rate is 30% for all firms. The risk-free rate is 3% and market portfolio return is 9%. The yield on the division’s debt is 6%. The information on the relevant established pot growing companies is given below:

Name	??	Debt/Equity
Kush Bottles	1	0.2
Terra Tech	1.15	0.4
Aurora Cannabis	1.7	1.2

a) What is the average of the project betas of the pure play firms?

b) What is the beta of the new pot growing division of the pharmaceutical company?

c) What is the cost of equity of the division?

d) What is the division’s WACC?

Answer 1